Question

In: Economics

Consider two individuals who have the same wealth level and probability of experiencing the same large...

Consider two individuals who have the same wealth level and probability of experiencing the same large health shock (and associated large financial shock). Individual A is more risk averse than individual B. Which individual is willing to pay a greater premium for health insurance?

a. Individual A

b. Individual B

c. Neither; individuals A and B are willing to pay the same premium, since they face the same risk

d. Cannot be determined

Solutions

Expert Solution

Option a is correct.

Two individuals who have same wealth level and probability of experiencing the same large health shock and associated with large financial shock. Individual A is more risk averse than individual B. Individual A is willing to pay a greater premium for health insurance. Because even both individuals have same probability of risk, Individual A is risk averse. So he will always try to avoid the risk associated with health shock and financial loss due to health shock. Therefore, he always willing to pay a greater premium for health insurance

All other options are wrong. Because individual A is risk averse than individual B

Rahul Sunny answered 2 years ago
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